Question

b) Given the following information, does the market area for a store with no competitors nearby change between i) and ii)?

            i) All consumers are willing to pay $12, while the store charges $6 and the (round-trip) transportation cost per km. is $0.5.

  ii) After a change in speed limits near the store and far away, the (round-trip) transportation cost per km. is $1 for the first 2 km. and 0.1 for each additional km thereafter

Answer 1

Yes, the market area for a store with no competitors nearby change between i) and ii) i.e. if there is change in the cost of travelling.

i) Consumers willingness to pay =$12, Price at store = $6. So consumer surplus is $6.

Given, the (round-trip) transportation cost per km. is $0.5, so if customers travel form 12 KM, the cost is 12×0.5 =$6, which is equal to consumer surplus. So the market area is 12 KM.

ii) After a change in speed limits near the store and far away, the (round-trip) transportation cost per km. is $1 for the first 2 km. and 0.1 for each additional km thereafter. Hence total distance which can be traveled in $6 = 2 km for $1, so there are 5 dollars still left. Further distance can be travelled at $0.1 per km. So in 5 dollars total distance whicj can be travelled is 5/0.1 =50 km. So total distance which can be travelled in $6 =2+50 = 52km. So the new market area is 52km